Study: CON Law Limits Medical Access, Boosts Costs

N.C. has 4th-most regulated services in nation

North Carolina has fewer hospital beds and MRI scanners than other states, and restrains psychiatric services because of a regulatory process that protects legacy health care providers, says a new study from the Mercatus Center at George Mason University in Virginia.

According to Christopher Koopman, a Mercatus Center research fellow and co-author of “Certificate-of-Need Laws: Implications for North Carolina,” the Tar Heel State regulates 25 separate medical services or devices through its certificate-of-need law — the fourth-highest number in the United States. The national average of regulated practices (among those states with CON laws) is 14.

“The easiest way to think about certificate of need is it’s a permission slip to compete from the government” in a particular market, Koopman said. That approval is layered atop standard licensing and training requirements.

“These programs are all about restricting competition, and they’ve been done so in the name of lowering costs or increasing care to the poor,” Koopman said.

“But we have quite a bit of evidence now that suggests neither of those have been achieved,” he said. “What is achieved is reduced competition, and reduced choice for those seeking care in North Carolina and other states that enforce certificate of need programs.”

The report was released as state Rep. Marilyn Avila, R-Wake, is working on certificate of need law reform legislation she plans to submit this session. She and state Rep. John Torbett, R-Gaston, authored CON reform bills in 2013 that failed to move out of the committee process.

In their report, Koopman and Mercatus Center scholar Thomas Stratmann, an economics professor at GMU, write that there are “serious consequences for continuing to enforce CON regulations” in North Carolina that can be assessed from 40 years of evidence involving certificate of need laws.

There are about 362 hospital beds per 100,000 people throughout the United States, but about 131 fewer beds per 100,000 people in North Carolina and states that regulate acute hospital beds through CON programs, according to the report.

An average of six hospitals per 500,000 residents offer MRI services across the United States, the report found. In CON states such as North Carolina that number is lower by 2.5 per 500,000 people.

An average of nine hospitals per 500,000 people offer CT scans nationwide, but CON regulations in states such as North Carolina account for a 37 percent decrease in those services, the report said.

“Certificate of Need is a process that has undergone a lot of scrutiny over the years, and it is possible to cherry-pick data and studies to support a particular point of view,” Julie Henry, vice president for communications at the North Carolina Hospital Association, said in response to the Mercatus Center study.

“The fact remains that the Certificate of Need law ensures the availability of necessary medical services for residents across North Carolina,” Henry said.

“North Carolina hospitals have consistently supported modifications to the complex application process, but believe that repealing the law itself could have devastating effects for the patients and communities we serve, especially during a time of tremendous change in the health care environment,” Henry said.

Koopman disagrees.

“I think for those people, particularly those policymakers that are interested in increasing affordable care for those people in the state, one of the simplest and easiest ways they can do this is to repeal these programs that ultimately stifle competition, and limit entry, and ultimately decrease the number of choices for those seeking care,” Koopman said.

However, he acknowledged, repealing CON laws is politically challenging.

“I think you have very strong incumbent interests that have a stake in seeing these things continue,” Koopman said. Providers that have received certificates of need are protected by the continuation of the programs, and “have a very strong incentive to protect these programs regardless of their ultimate outcome on competition and consumers.”

The North Carolina Hospital Association lobbied heaviliy against CON reform in 2013, arguing that it would create upheaval in the regulated health care market.

“This is a problem that economists have tried to grapple with for some time now,” Koopman said.

Facilities “sunk certain investments into devices or services thinking they were going to be protected by the program in the future, or they incurred costs that were related to this program,” Koopman said.

“In the short term they may ultimately lose out on some of those investments that they’ve made,” he said. “But in the longer term the state of North Carolina and the people of North Carolina seeking quality care will be much better off because of the repeal of this.”

The federal government repealed its certificate of need mandate on the states in 1987 because the cost-control promise failed to pan out, and 14 states followed suit.

“Conservatives tend to think that those are just protectionist measures to protect legacy providers. You ask your competition if you can be allowed to expand more services to compete with them. How stupid is that?” said Devon Herrick, senior fellow and health economist at the Dallas-based National Center for Policy Analysis.

“Competition is good,” Herrick said. “If you build a hospital, the hospital will find any way it can to fill beds. … But if a hospital across the street is also competing for patients, health plans will have an easier time negotiating discounts with those hospitals,” and consumers will benefit.

The most likely beneficiaries of repealing or relaxing certificate of need laws would be ambulatory surgery centers, freestanding radiology clinics, and the like, Herrick said.

“Certain things, it may not affect as much, but especially at the margins entrepreneurs are the ones who want to build and provide new services, and if you limit that, the big players who have been there forever have little reason to discount their services or even try to do things to attract patients,” Herrick said.

In North Carolina, the CON process includes approval from the Certificate of Need Section in the state Department of Health and Human Services’ North Carolina Division of Health Service Regulation. The DHHS website says:
“The fundamental premise of the CON law is that increasing health care costs may be controlled by governmental restrictions on the unnecessary duplication of medical facilities.”